In-Kind Donations: How to Properly Value and Record Them
A food bank receives a pallet of canned goods. A local law firm provides pro bono legal work. A church lets a community nonprofit use its hall rent-free for a year. Each of these are an example of a generous in-kind donation, and each raises a pair of accounting questions:
What is it worth? And how should it be recorded?
In-kind contributions are a major source of support for many nonprofits, but they must be properly accounted for. Getting the valuation and documentation correct will protect your financial statements, audit results and credibility with donors and grantmakers.
Let’s talk about what your nonprofit must do.
What the Standards Require
Under U.S. generally accepted accounting principles (GAAP), nonprofits typically record contributions at fair market value (FMV) on the date they are received. FMV is the price you would receive to sell an asset, or pay to transfer a liability, in an orderly transaction between market participants.
This doesn’t mean asking the donor what it cost them. And it doesn’t mean recording what the donation means to your mission. It means determining what the item or service would cost on the open market.
Each of the three categories of in-kind gifts get different treatment:
Donated Goods
You record donated goods by crediting an in-kind contribution revenue account at fair market value, as well as debiting a corresponding asset (such as inventory, equipment or supplies) or expense account, depending on how the item is used. Donated securities, vehicles, furniture, food and medical supplies all fall into this group.
Donated Services
You only record donated services in limited circumstances. Under Accounting Standards Codification (ASC) 958-605, a service is recognized if one of the following two descriptions are true:
- It creates or enhances a nonfinancial asset, such as volunteers who help build or renovate a facility; or
- It requires specialized skills, is provided by someone who has those skills and would typically need to be purchased if it weren’t donated. Business accountants, legal, IT consulting, engineering and medical care are common examples.
General volunteer time, such as stuffing envelopes, staffing a registration table or serving meals, usually doesn’t meet either test and shouldn’t be recorded, no matter how valuable it is to your organization.
Donated Building Space
Donated use of building space/facilities is another area to watch. If a donor gives you free use of space, you likely will need to record it as contribution revenue (some organizations will have a separate contribution rent revenue account), as well as an offsetting rent expense at FMV.
Determining Fair Market Value
This is where organizations most often struggle. The right method depends on what was donated:
- Used goods and supplies. Look for observable prices for comparable items in similar condition. You may find this in thrift store pricing guides, online marketplace listings and published resale values. Condition matters, too; a worn desk is not worth the same as a new one.
- Food and consumables. Local retail prices for the same items are generally a reasonable starting point. Some organizations use industry-published per-pound values. Whatever you use, apply the rule consistently and support it with the appropriate services.
- Professional services. Use the rates the provider would normally charge the public, adjusted for any discounts a paying customer might reasonably expect. A written statement from the provider showing the hours worked and the standard rate is ideal.
- Building space. Use the owner’s normal commercial rental rate. If that’s not available, research comparable local properties per square foot.
- Real estate and high-value assets. For large or unique items (land, buildings, artwork, specialized equipment, etc.) a professional appraisal is the strongest form of support. It also might be necessary for audit purposes.
A frequent point of confusion are the different responsibilities of the nonprofit and the donor.
The donor is responsible for determining the value of a gift for tax purposes. In fact, your acknowledgment letter should describe the item without assigning a dollar amount. However, your organization must independently determine FMV for financial reporting. And these two numbers won’t necessarily match.
Donation Documentation
Auditors, grantors and/or the IRS may ask how you arrived at your numbers. Among the best sources of documentation are:
- A written gift acceptance policy that explains which in-kind gifts you accept, who approves them and how they are valued.
- A donor acknowledgment letter listing the date, a description of the item or service and (for non-cash gifts) the donor’s statement of whether any goods or services were provided in return.
- A receiving log or intake form with the item’s condition, quantity and date received.
- Valuation support, such as price comparisons, provider rate sheets, appraisals or published pricing guides.
- Records showing how the item was used, sold or distributed.
Keep these records with your accounting files so they’re easier to retrieve at year-end and at tax time.
Presentation and Disclosure Requirements
Financial Accounting Standards Board (FASB) Accounting Standards Update 2020-07 changed how nonprofits report contributed nonfinancial assets. Gifts now must appear as a separate line item on the statement of activities, apart from cash contributions. The footnotes must also break the contributions down by category and describe whether the gifts carry donor restrictions, your policy on using or selling them, and the valuation techniques and inputs you used.
Larger organizations should also review Form 990 reporting requirements, including Schedule M for non-cash contributions.
If your organization sells certain donated property within three years of receiving it, you might need to complete additional IRS reporting on Form 8282.
Common Mistakes to Avoid
There are several errors that come up repeatedly, including recording general volunteer hours as services, accepting the donor’s stated value without testing it, failing to keep valuation support and lumping in-kind gifts in with cash contributions. And each can lead to audit adjustments or questions from funders.
Applying a consistent, documented approach throughout the year makes year-end reporting far smoother.
Need Help With Your Nonprofit’s In-Kind Reporting?
In-kind donations can strengthen your mission, but only when they are valued, recorded and disclosed correctly. A clear policy and good documentation habits go a long way toward keeping your financial statements accurate and your audit on track.
McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that serves nonprofit organizations. Our experienced team can help your organization develop gift acceptance and valuation policies, apply the right accounting standards to contributed goods and services, and prepare financial statements that stand up to scrutiny.
Call us at 440.892.8900 or contact us online to learn how we can support your nonprofit.
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